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Fix is worse than the problem

Alan Braunholtz

Perhaps part of Social Security’s problem is that it does what it says rather efficiently. This puts the lie to those who embrace the stance that any government is bad government. That’s a bit hypocritical for some. Under the present lot, government has done nothing but expand to help out pet conservative causes. Big government on behalf of the right people is OK, apparently.Anyway, back to Social Security, whose administrative costs are 0.6 percent of benefits. This beats any private pension schemes, which eat up 1015 percent in overhead. It’s also worked brilliantly at being a program for everyone (social) and safe (security). When FDR introduced it, two-thirds of seniors existed below the poverty line. Now less than 10 percent do. Not surprisingly it’s very popular, which galls those who hate anything with the word “social” in it on principle. They’ve been trying to undermine it for decades by criticizing and casting doubts. G.W. Bush predicted in 1978 that Social Security would be broke in 10 years, and privatization was the cure. Now we hear it again. Is it true? Not really.In 2018, Social Security will pay out more than it takes in. It’s done this 12 times over the past 47 years, though since 1983 Social Security’s been collecting more than it’s paid out. $151 billion last year and with interest ($87 billion at 5.7 percent in 2004), it’ll have a surplus of $5 trillion in assets by 2018. If nothing is done, these reserves will cover the shortfall till 2052, according to the Congressional Budget Office. Then it’ll take in about 80 percent of what it needs to pay out.President Bush likes to call these assets “just paper, only IOUs.” It’s a little disingenuous on his part. Dollar bills are only bits of paper, too. These bits of paper are securities guaranteed by the U.S. government. This is as safe as investments get. This is why countries like China and Japan snap up U.S. treasury bonds. The U.S. would have to fiscally collapse or pass a law saying we’ll pay the Chinese but not our old people for these IOUs to be worthless. Neither is remotely likely. The war and those energizing tax cuts for the rich all depended on IOUs written to the security surplus, and these will have to be paid back by taxes, cuts or borrowing.Privatizing Social Security would only make matters worse in the short term. By putting one-third of Social Security tax revenue into private accounts, you create a huge shortfall of money to pay out current benefits with. The transition costs of privatization amount to $15 trillion over the 40 years before the young worker retires. This would be covered by borrowing money again.In the United Kingdom, private accounts didn’t work too well. Huge fees, corrupt brokers and bad investments mean that 75 percent of private account holders won’t have adequate pensions. They’re trying to move back to a secure one-size-fits-all scheme. Never underestimate fees and financial institutions’ ability to vacuum up wealth for themselves. Look at what your banks been doing with your credit card, jacking up fees and penalties while shortening grace periods. Americans actually started paying off their bills, which reduced their interest earnings, so they made up the difference in higher fees and penalties.Privatization looks to be a knee-jerk philosophy rather than a thought-through solution. Personal savings are important, but as an addition to Social Security not instead of. Maybe a few policies aimed at converting frivolous consumerism into savings would be more helpful, a sales tax perhaps.Social Security does need some tweaking to avoid the shortfalls after 2052, but there are other ideas out there.One fun suggestion is to raise wages. Then there would be more taxes flowing in. It’s not happening in this sluggish recovery, though. Most of the income growth goes to corporations and not to ordinary people. The minimum wage has stayed at $5.15 per hour since 1996, even though corporate revenue rose a lot.Another is to raise the $90,000 cap on taxable income and then for the heck of it consider unearned income, too.We’re all living longer and healthier, so raising the retirement age would make sense to everyone except golf course managers.The current proposal to effectively means test benefits in the future sounds OK at first. The more you earn, the more likely you’ll have other pensions, so you could afford a relatively larger cut in benefits. The only problem is that Social Security needs middle-class support to survive. Cut their benefits too much and they might not see the point. Private accounts would make this worse, since these lost taxes would also be taken out making their check even smaller.Cynics will say this is part of the plan, to undermine Social Security and any other vestiges of a caring so-called nanny state where no one has obligations to anyone but themselves.That’s probably too Machiavellian for this government. Much more likely that they’ve glimpsed a problem, then made an ideological leap without looking at the landing too hard.Consider the war in Iraq.Alan Braunholtz of Vail writes a weekly column for the Daily.Vail, Colorado


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